The Department of Labor has released a second set of frequently asked questions (FAQ) regarding its Conflict of Interest Rule, and is meant to address some of the confusion and complexity surrounding the new fiduciary law.
This time, however, it’s aimed at consumers, and tackles basic issues like why the rule was implemented in the first place and how it will “better protect retirement savings,” which is in contrast to the industry-oriented fiduciary FAQ released in late October.
“How much do America’s working families lose due to conflicted advice?” asks question No. 7, before answering “In IRAs alone, conflicted advice is costing America’s working families about $17 billion per year, according to a report from the President’s Council of Economic Advisers.”
“Will financial advisors still get paid for providing retirement investment advice?” queries question No. 9. “I’ve heard that some advisors will get ‘exemptions.’ What does that mean?”
“Financial advisors deserve to be paid a fair and reasonable fee for their advice,” it answers. “And, retirement investors may wish to pay for advice in different ways—through commissions, an hourly fee, or an advisory fee based on the value of the account. Under the new Rule, some types of compensation are prohibited because of the advisor’s conflict of interest, unless we grant them an ‘exemption.’
Questions 20 and 21 specifically address 401k participants, the former mentioning 401k education and the latter stockbrokers and insurance agents. The questions are answered at some length:
Question 20
I am a 401k plan participant. My financial adviser tells me that he is providing me with investment education but not advice. What is the difference?
Education is general financial and investment information and cannot include an investment recommendation. Being an educated consumer is important. Your financial adviser can help you be an educated consumer without giving you fiduciary investment advice. You should still be able to expect that the education provides accurate information and is not misleading. The following information or materials are typical types of financial and investment education:
- Plan and investment information (information and materials that describe investments or plan alternatives without specifically recommending particular investments or strategies). This includes descriptions of the investment objectives and philosophies of plan investment options, mutual funds, or other investments; their risk and return characteristics; historical returns; the fees associated with the investments; distribution options; contract features; or similar information about the investments.
- General financial, investment, and retirement information. This includes information on standard financial and investment concepts, such as diversification, risk and return, tax-deferred investments; historic differences in rates of return between different asset classes (e.g., equities, bonds, cash); effects of inflation; estimating future retirement needs and investment time horizons; assessing risk tolerance; or general strategies for managing assets in retirement.
- Asset allocation models. This includes information and materials on hypothetical asset allocations as long as they are based on generally accepted investment theories, explain the assumptions on which they are based, and do not cross the line to making specific investment recommendations. For your 401k plan, the models may reference specific designated investment alternatives on your plan’s menu as hypothetical examples to aid your understanding, as long as the examples meet the Rule’s protective conditions.
- Interactive investment materials. This includes a variety of questionnaires, worksheets, software, and similar materials that would enable you to estimate future retirement needs and to assess the impact of different investment allocations on retirement income, as long as your financial adviser meets conditions similar to those described for asset allocation models.
Question 21
I receive financial advice from a stockbroker and an insurance agent for my 401k plan investments. Does the Rule apply to these types of financial advisers?
Yes. The Rule is not limited to financial professionals who call themselves “financial advisers” or “investment advisers.” When you pay stockbrokers, insurance agents, registered investment advisers or bank employees for advice about investments in your 401k account they become investment advice fiduciaries.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
